What is a 1099-C Cancellation of Debt form?
Key takeaways
- You will receive a 1099-C Cancelation of Debt form if a lender forgives more than $600 of taxable debt.
- You must include the amount of canceled debt on your federal tax return as a part of your taxable income.
- Some instances warrant the exclusion of forgiven debt from your return, including monetary gifts and some qualified student loans.
Getting out of debt is a significant achievement. Whether it’s overcoming credit card balances, student loans or mortgage debts, the relief of financial freedom is often accompanied by newfound opportunities and plans for the future.
However, if you’ve recently had a debt canceled, it’s essential to understand the tax implications of that victory.
Enter Form 1099-C, the “Cancelation of Debt” form. This document is crucial for reporting canceled debts to the IRS, and it’s important for consumers who have worked hard to become debt-free or pay down their debt to know what it entails.
What is Form 1099-C?
Form 1099-C is a tax form that creditors must file when they cancel a $600 or more debt.
For example, if you negotiate a debt settlement on your credit cards, you might have some of your credit card debt forgiven. That counts as a debt cancelation, and you should expect a 1099-C cancelation of debt form in the mail.
You might also have debts canceled if your student loans are forgiven, if your mortgage is modified or even if your home goes into foreclosure. These canceled debts could generate a 1099-C form, meaning you might have to pay debt forgiveness or settlement tax.
When is canceled debt taxable?
The IRS generally treats canceled debt as taxable income, which means if a creditor forgives a portion of your debt, you are typically required to report it on your tax return.
Here are key points to consider regarding the taxability of canceled debt:
- If a creditor cancels a debt, that amount is usually considered income, which could increase your tax bill for that year.
- If your debt was canceled as part of a bankruptcy discharge, that amount is not taxable. This is an important consideration for consumers who may have sought bankruptcy relief to regain financial stability.
- If you were financially insolvent at the time the debt was canceled (meaning your total liabilities exceeded your total assets), you might not owe tax on the canceled debt. To claim this exclusion, you would need to file Form 982 with your tax return.
Understanding whether your canceled debt is taxable is vital for your financial planning — especially if you’ve recently worked hard to get out of debt.
Exclusions for tax on canceled debt
The IRS has some 1099 debt forgiveness exclusions — which means if your debt falls into an excepted or excluded category, you do not have to include it as ordinary income on your tax return.
Some common exceptions to the debt cancellation rule include:
- Amounts canceled as gifts, bequest or inheritances.
- Certain qualified student loans.
- Certain education loan repayment or loan forgiveness programs to help provide health. services in certain areas.
- Canceled debt that would be deductible if you paid it.
- A qualified purchase price reduction on a property.
- Any amounts discharged from certain federal, private or educational student loans.
There are also some common debts that the IRS states can be excluded from your gross income, including:
- Debt canceled in a Title 11 bankruptcy case.
- Debt canceled to the extent insolvent.
- Cancelation of qualified farm or residential property indebtedness.
- Cancelation of qualified real property business indebtedness.
- Cancelation of qualified principal residence indebtedness that is discharged subject to an arrangement that is entered into and evidenced in writing before Jan. 1, 2026.
If your debts cannot be canceled and you do not qualify for a payment plan with the IRS, you may want to consider a debt consolidation loan or debt relief. Note that the cost of an IRS plan is likely much less than you would pay using a third-party option.
When should you file Form 1099-C?
If your debts have been recently canceled, it’s important to understand when Form 1099-C is filed. This form must be submitted by creditors when they cancel a debt of $600 or more.
- Timing: Creditors are required to issue Form 1099-C for the tax year in which the debt was canceled. For example, if a debt was forgiven in 2024, the creditor must file the form by Jan. 31, 2025, and you should receive your copy by the same date.
- IRS submission deadlines: Along with providing you with a copy, creditors must also submit Form 1099-C to the IRS by the end of February (or March 31 if filed electronically) for that same tax year.
As a consumer, being aware of these deadlines can help you prepare for your tax return and avoid any potential penalties related to late or missed filings.
How do you file Form 1099-C?
Here’s a guide on how to approach Form 1099-C and what information is typically included on the form.
Information included on Form 1099-C
Here’s a quick breakdown of the information included on the Form 1099-C, in addition to your name and address:
- Line 1: Date of identifiable event: This line indicates the date when the earliest identifiable event occurred or the date when the debt was discharged.
- Line 2: Amount of debt discharged: Line 2 displays the total amount of debt that has been discharged. If you believe this amount is incorrect, reach out to the creditor for clarification.
- Line 3: Interest included in Line 2: This line shows any interest that is included in the debt amount reported in Line 2.
- Line 4: Description of debt: Line 4 provides a description of the debt. If Line 7 is filled out, it will also include a description of the associated property.
- Line 5: Check here if personally liable: Line 5 indicates whether you were personally responsible for repaying the debt at the time it was created or last modified, if applicable.
- Line 6: Identifiable event code: This line contains the code that explains the reason for the creditor filing the form.
- Line 7: Fair market value of property: If a foreclosure or property abandonment occurred within the same year in relation to the canceled debt, Line 7 will reflect the fair market value. If not, you will receive a separate 1099-A form.
What to do with your 1099-C
Take the following steps when you receive Form 1099-C to ensure compliance with tax regulations:
- Review the form: Carefully check the accuracy of the information on the form. If there are discrepancies, you should contact the creditor to resolve them.
- Determine taxability: Canceled debt is generally taxable, but debtors can claim exclusions for bankruptcy, insolvency or certain types of student loan forgiveness. Consult a tax professional to understand eligibility for exclusions.
- Report on tax return: When filing your tax return, you must report the canceled debt. Generally, this information goes on Schedule 1 of Form 1040. If claiming exclusions, complete Form 982 to formally exclude the canceled debt from taxable income.
- Maintain documentation: Keep a copy of Form 1099-C and any related documents for future reference, especially in case of an audit.
The bottom line
For consumers who have recently had debt discharged, understanding Form 1099-C is vital. While achieving debt freedom is a significant milestone, it comes with tax implications.
Knowing when canceled debt is taxable and about available exclusions can help you manage your financial situation effectively.
If you have questions or concerns about how canceled debt affects your taxes, consider consulting a tax professional for personalized guidance. Your hard work in overcoming debt deserves to be celebrated, and with proper planning, you can enjoy your financial freedom without unnecessary tax burdens.
